How intercompany eliminations work in Oracle HFM

posted on January 19, 2015 by Darshana Sanghavi

In preparing consolidated financial statements, we need to eliminate transactions between companies or entities included in the group for consolidation and only report results arising out of transactions with third parties. This is achieved thru intercompany elimination.

Say if Holding Company H1 has 2 subsidiary companies S1 & S2.
S1 sales are $50 mn. Of these S1 sold goods of $1 mn to S2.
S2 sales are $20 mn.

So at H1 level, the group sales to third parties is $(50-1+20)mn i.e. $69mn. The sale from S1 to S2 cannot be reported as group sales at H1 consolidated level as these are intercompany.

Steps to setup interco elimination in HFM

1. Enable entity member attributeIsICP.

• Y: If the entity can have intercompany transactions
• N: If the entity cannot have intercompany transactions

Once an entity is marked as IsICP=Y, the same will automatically appear as a member in the ICP dimension.

2. If account is an intercompany account, enable the attributeIsICP.

• Y: If self ICP transactions are allowed for that account
• N: If account cannot have ICP transactions
• R: Account can have ICP transactions but not with itself.

Generally you would mark the account as R as an entity cannot have an interco transaction with itself unless it is a subconsolidated entity and reports a single set of financials to the corporate consolidation team.

3. Set up plug account. What is the purpose of a Plug account? In the perfect world one would expect all intercompany balances to match. However that is not the case always in the real world. Due to timing differences or accounting differences the balances for interco partners may not match. So we need to record the differences between the paired accounts for the partner entities involved. Plug accounts are used to store such differences. This helps the consolidation team to track eliminations. The Plug account is always having IsICP=N. These differences are then treated as balances with third parties.

Role of Value Dimension& Elimination Logic

Intercompany transactions are reported at Entity Currency members of the Value dimension. When these are eliminated the reversal entries are created thru automated journals and stored in the Elimination member of the Value dimension. As a result at the first immediate common parent entity the interco account has zero balance for Entity Currency. The second leg of the reversal entry is in the Plug Account of the ICP account and the value flows to Entity Currency of the first common parent of the entity.

Elimination is triggered whenever a data consolidation is triggered. Calculations, translations and eliminations take place as part of the consolidation process.

Let us take an example to understand the logic better.

Below is a simple entity structure with California as parent and its child entities:

Case I:-San Francisco & Belmont are interco partners. San Francisco has recorded sale of $1,000 to Belmont. Also Belmont has recorded purchases from San Francisco of $1,000. These transactions can be seen in the grid below.

Entity is in the rows & ICP is in the columns.

As can be seen above, both transactions are matching and there is no mismatch. Hence at parent Entity California level the Interco Difference A/c is NIL.

Case II:- San Francisco also has purchases from Monterey. Monterey has reported a sale of $500 to San Francisco. But San Francisco has recorded a purchase of $600 from Monterey.

So now at common parent California we have an interco mismatch of $100. This amount is negative $100 as the ICP Plug A/c Interco DiffP is a Revenue type of account in our example.

How is this reflected in [Elimination] member in Value Dimension? Let us take a look at the below grid to understand this better.

When a consolidation is triggered at parent entity level California, the interco balances reported by each entity at <Entity Currency> level are reversed thru [Elimination] member via the ICP Plug account.

At the parent entity California, the ICP Plug balance which is unmatched interco amount across its interco children entities flows thru the <Entity Currency>member.